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Student Loans – Pay Now or Later?

Financial experts often differentiate “good debts” and “bad debts”. Good debts are those that either have an immediate return, or they have a potential for future return. Bad debts are loans for depreciating assets such as a new boat or a quad. They show no promise for a future return, but rather, gaurentee a future loss of wealth.

Student loans are considered a “good debt” because in furthering your education, you’ll have the potential to earn a higher salary. The lost income from the loans will be outweighed by the lifetime of higher earnings.

My wife and I have experienced loan repayment and I have to say, I didn’t like it one bit. Initially, since we were fresh out of school, we didn’t have high-paying jobs that could support our debt payments. Coming up with the $75 minimum payments was even a struggle. Once we were in a position to pay more than the minimum, I decided that I wanted the entire loan to be gone. I was going to pay off that loan as fast as I possibly could.

Our friends thought we were crazy; “Why are you working so hard to pay off those loans now? You have your whole lives to pay them back.” When I reviewed our Direct Loan summary, I realised that by making minimum payments, the total bill would be 1.5 times what we had borrowed initially!

Then we had our “Finance Savvy” friends that thought we were financially retarded. “Why would you pay back those loans? The percent is only 6.8% and you could make nearly 12% in the market. You would be smarter to invest and pay only the minimum payments on your loan.” Well, this sounds so wise, but guess what? The market plummeted and it’s still uncertain today. If we would have invested instead of repaying the loans, we would have lost half of our investment, PLUS we would still have to repay those student loans!

I am so glad that we decided to pay our student loans off immediately. It saved me about $2,500 in interest payments, and it was a no-risk decision! I knew that if I paid it quickly, I would avoid the 6.8% interest payments.

Life is going to be so much better when we are completely free from debt. When I write that final check, all my stress is just going to melt away!

It’s pretty obvious that I like to be financially secure. With the economy in a fragile state, I’m looking at the worst case scenario. What if I still had those student loans and I lost my job? Suddenly, I have no income, perhaps no dwelling, and I have the collection agency knocking at my door (figuratively speaking….since I would have no door to call my own), looking for their money. This is a pretty scary scenario, which could damage you for many years!

Since I repaid those loans and was recently able to pay for my car with cash, if I lost my job at least I could sleep in my car! It’s not glamorous, but it’s definitely better than losing my home, car, and still be in debt!

The moral: Pay Off Those Debts! You’ll be glad you did.

Get Out of Debt Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

8 Comments

  1. We have student loans but they are not very high on our priority list. Our credit card is! Our student loans have a really low interest rate (2.5%), and we are able to take an interest deduction. It helps us with taxes. So, I am not too overly concerned with them right now.

    You did so great (I feel jealous a bit). It is definitely worth to pay off the debt as soon as possible. You are my inspiration! 🙂

    • It’s true Aloysa. Thanks for pointing that out. If there are other outstanding debts that have a higher interest rate than your student loans, by all means, pay them off first! But, if you are just sitting on your student loans and have no other debts, I think that’s a very risky position to be in.

  2. I just posed this same question on my own blog, and one of my commenters pointed out that by paying off the student loan, it’s like an investment/savings with a guaranteed 6.8% return. (Because for every $100 you put into paying it, you *save* $6.80 that year.)

    It seems obvious now that she said it, but I didn’t look at it that way before. Even if you think you can probably get 11% in the market, I personally like the 6.8% guaranteed return better!

    Then, the other factor is cash flow. I would say, build up an emergency fund rather than making extra loan payments at first – then if you lose your job, you can continue making your minimum payments!

  3. I’m definately paying down my 6.8% loans. What if the market does something wierd and you only get 8%. or 6%. Including inflation you’ve lost money.

    Totally agree with Kellen. You defiantely get a 6.8% return when you pay down that loan.

    • I agree 100%! Keep paying down those loans and avoid the interest. If you look at the wealthy – they have avoided interest payments. If you look at those with very little net worth, they have tons and tons of interest payments.


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